How Apple—and the Rest of Silicon Valley—Avoids the Tax Man

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Today, the European Union ordered Apple to pay $14.5 billion dollars in back taxes, which its antitrust regulator says the company owes because a sweetheart tax deal offered by Ireland violated EU policy.

The penalty, which is the largest the EU has ever lobbied against a single corporation, signals that the Union is getting increasingly serious about holding foreign companies accountable for their tax bills. But Apple is far from alone.

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For sheer ingenuity, you can’t beat Silicon Valley—especially at outsmarting the tax man. By selling intellectual property rights to sock-puppet subsidiaries, tech giants shift profits to low-tax nations like Ireland. But that’s just a start. Sublicense the IP to a second Irish unit that books global sales, have entity B pay onerous royalties back to A (wiping out its earnings), then show that A is headquartered in the Caribbean, making its royalty income untaxable in Ireland. Slick! Only problem: Until the IRS gets its cut, the companies can’t bring the cash back home to use it. Hmm … not so genius after all.

*Editor's note: This story originally appeared in the April 2014 issue of WIRED; it has been updated to reflect breaking news. Figures are for 2012 (except Microsoft: 2011); R&D cost-sharing payments to US parent companies and some IP paths not shown. Information on the sources for the infographic can be found here. *